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High-Risk Merchant Accounts: What You Need to Know
High-risk merchant accounts can affect the fees you pay to take card payments. Here’s how they could affect your business.
What is a High-Risk Merchant Account?
A merchant account allows businesses to accept credit and debit card payments. It works by acting as an intermediary between your business bank account and your customers’ banks. When a customer makes a purchase, the money goes through a payment gateway, then a payment processor, before being held in a merchant account for final checks.
Each of these steps means the transaction is properly checked to ensure it can happen, so it avoids any hassle for the business or the customer. However, some businesses come with a heightened vulnerability to problems occurring in the transaction process. This could be due to various things like the business’s industry, its credit history, or other factors.
When businesses like these apply for a merchant account, they’re often provided with a high-risk merchant account. These merchant accounts work the same as normal ones, just with some added protections for the merchant account provider. Find out all you need to know about high-risk merchant accounts in this article.
How High-Risk Merchant Accounts Work
As you probably already know, the financial world runs on risk. Banks don’t like to lend money to individuals and businesses with poor credit scores due to a heightened risk, just as they don’t like to loan a large mortgage to someone without an income. By the same token, merchant account providers don’t want to expose themselves to the risk of having to deal with more chargebacks, higher incidences of fraud, or your business going under.
Because of this, when they do give such businesses a merchant account, it’s a high-risk one. These types of merchant accounts mitigate against the increased risk with things like higher and more checks. Whatever the reason for your acquiring bank categorising your business as high risk, some of the biggest things to watch out for include the following:
Rolling Reserve
A deposit held by your merchant account provider, typically 5-20% of your monthly transactions. A rolling reserve is fairly common for high-risk merchants as they are useful for acquiring banks to shelter themselves from the increased risk of chargebacks.
Higher Processing Fees
High-risk merchant accounts often have higher fees than other merchant accounts. This is because the acquiring bank wants to insure itself against the increased risk of problems occurring during the transaction process.
Stricter Contracts
Businesses with a high-risk merchant account often face stricter terms and conditions, including frequent account reviews, hefty termination fees, and longer settlement periods.
Want to know more about how card payments work?
While this article focuses on high-risk merchant accounts, we also have in-depth guides that fully explain all you need to know about taking payments. Explore below:
Which Category is my Business in?
Businesses are high risk when there is a higher likelihood of exposure to operational or regulatory risk. It’s not just your industry and credit score that can affect whether your business is deemed to be high risk. Other factors include:
- Your average transaction size.
- The incidence of fraud within your industry.
- Your refund ratio.
- Your general financial stability.
Other merchant accounts (perceived as a lower risk to the acquiring bank), meanwhile, will typically be offered to a business that operates in an industry outside the high-risk list, deals with a lower average transaction size, and sends out a low number of refunds.
As explained above, this reduced risk of financial turbulence is often reflected in the fees businesses like this have to pay. There’s also more flexibility with who to choose for these businesses, as many processors are happy to offer them an account.
However, while other merchant accounts do have lower fees and businesses applicable to them have a broader choice of providers, the accounts they have will also come with some drawbacks.
The acquiring bank, for example, won’t expect anything out of the ordinary. So if the business starts making more large transactions or experiences an influx of refund requests, the merchant account could be frozen. This would be typical of a high-risk account, so the chances of such an account being frozen are reduced.
So you see, despite their name, high-risk merchant accounts do have some benefits over other merchant accounts. If you’re ready to open a merchant and you’re wondering how to do it, read our ultimate guide on merchant accounts. Alternatively, you can answer the question below to find out exactly how much you can get a merchant account for.
No Credit Check Merchant Accounts
If it’s not your business’s industry that makes you think you’ll be deemed as high risk but your credit history, there’s hope yet.
As you’ve read, merchant account providers want to ensure your business’s financial stability, as they rely on this to ensure you can fulfil your contractual obligations. A poor credit score, therefore, can negatively affect how merchant account providers view your application, potentially leading to fewer options and less favourable contract terms.
If your business needs a merchant account but you have a poor credit history, there are merchant account providers that don’t check your credit history; that way you can be sure your application is given the best chance of being accepted and your terms are more likely to be more reasonable.
FAQs
What is a high-risk-merchant account?
High-risk merchant accounts are offered to businesses that operate in a way that payment processors deem as high-risk. This could be because of their industry, the way their customers tend to pay, or the size of a typical transaction.
They work broadly the same as every other merchant account but involve typically higher fees or extra checks.
Is my business high risk?
Businesses are high risk when there is a higher likelihood of exposure to operational or regulatory risk. It’s not just your industry and credit score that can affect whether your business is deemed to be high risk. Other factors include:
- Your average transaction size.
- The incidence of fraud within your industry.
- Your refund ratio.
- Your general financial stability.
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